Every business owner and freelancer should know how to calculate billable hours to secure their income and financial well-being. Questions like “How do I calculate my billable hours?” “Do I need a billable hours calculator?” need to be adequately addressed before you suffer the consequences of poor financial management.
In a previous article, we focused our attention on how to write an invoice for your freelance work from A to Z. Now it’s time to show you how to calculate billable hours in the first place.
The definition of billable hours
Generally, freelancers, start-ups, and creative agencies track their work in billable hours. So, what exactly are billable hours? Very simply, they are the total hours of work. When teams work on multiple tasks or professionals undertake many projects, the concept of billable time is valuable as it helps them keep their billable hours under control and manage the overall workload.
The perks of tracking billable hours
Tracking your time gives you substantial information about how much you work. Therefore, it directly affects the way you calculate your billable hours. The tracking process can also facilitate the way you create budgets for future projects (if you’re part of a team). At the same time, it helps you invoice your clients accurately and provides you with hard data. This data can be used to pay employees for their working hours as small business owners or share the payment with partnering freelancers. If you don’t track billable time accurately, no one will get paid for their labor’s worth.
How to determine your billable hours
You’ve decided to start tracking your hours from now on. But are you sure which tasks qualify as billable? The list of things you may include can be quite long, depending on your profession and other miscellaneous factors.
Billable time usually includes the exact working time and project documentation. Many professionals also track and charge the planning and research phases. The meetings, any unexpected communication, and email correspondence can also count as billable. Let’s not forget the travel time (if relevant) and, of course, the retouching of the project upon agreement with the client.
All of the cases mentioned above are important since they are related to the quality and quantity of the deliverables handed over to your clients. So, next time you invoice a client for a project, you can calculate the billable hours taking into consideration all the above instances.
Billable vs. non-billable hours: How to tell them apart
We’ve just explained all about the nature of billable hours and the most common tasks that can be tracked as billable hours. But what about the non-billable time? How could we define non-billable hours? Sometimes the line between what should be charged or not is blurry.
Every time that you doubt what to do, ask yourself the following questions. Have you misused the time you’ve spent on the project? Have you spent much time setting straight your own mistakes? Has the time spent advanced the project forward or not? If you want to invoice your clients without straying from ethical billing practices, answer the above questions sincerely. Overbilling your clients will not get you more clients or a good reputation. Quite the opposite.
Depending on the project, business, and occasion, you could track as non-billable time, always using your time tracking software, all the hours that you’ve met your client before signing a contract as well as any project-related training. Social occasions with your team and clients could also be treated as non-billable times. Thus, a billable hours tracker can help you separate actual work from preparatory non-billable stages in order to give you agency over the way you allocate time.
How to set your billing rate
As much as you need to know how to calculate billable hours, you also need to know how to set your billing rate. The hourly rate definition is the amount of money that a professional charges for an hour’s work. Each industry has different billing rates for its professionals. Your experience and qualifications as well as the popularity of a job increase or decrease the earnings for a position.
To set your hourly rate, first, think about how much you would like to make per year. Don’t forget to add a percentage for the freelance business expenses. You too will have business expenses since you won’t be an employee anymore, right? Plus, you may also want to specify a percentage of annual profit.
Let’s see an example:
Jenny is a senior web developer. For a senior position, she would receive a salary of around $100.000, and she estimates her business expenses to be about $15.000. At the same time, she wants to have an extra profit of 10%, working 1400 hours a year. Let’s do some basic math calculations to figure out what her web developer hourly rate will be:
How to calculate billable hours
Now that you have set your rate, it’s time to learn how to calculate billable hours: you gather your billable hours to be invoiced to a specific client and multiply them by your hourly billing rate. This sounds pretty easy, but only if you have one client with one project. However, if you have multiple clients and projects with different billing rates, then you need to be extra careful to add the different rates correctly and calculate the work done accordingly.
The importance of time tracking
Accurate hour billing is essential, and there arises the need for a time-tracking partner that can work as a billable hours calculator for you! For example, lawyers and consultants need a billable hours tracker to have a total overview of their time and subsequent revenue. They will also organize their schedules better and have a log of time entries to fall back on when invoicing multiple clients.
For freelancers, in general, a billable hours calculator will allow you to track time in real-time and submit your hours in weekly timesheets. Additionally, it offers you extensive reporting regarding how and on what tasks or projects you track time. If you're part of a team that works on many projects, a platform where you and your colleagues/employees can track billable hours on every project you are involved in is indispensable: You and your team can set billing rates per hour, per task, per assignee or even have a fixed cost to cover everything concerning a specific project.
To sum up…
…knowing how to calculate billable hours is valuable to any business. Regardless if you do it by yourself or if you have a billable hours tracker to lift the weight off your shoulders. This kind of meticulous time tracking strategy improves your invoicing stats. On top of everything, it builds your business integrity since precise time tracking results in spot-on professional invoices and helps you maintain transparent client relations.